Saturday 23 July 2011 19.08 EDT
First published on Saturday 23 July 2011 19.08 EDT

A curious thing happened last week. European governments rose to the occasion. The euro, confidently predicted by almost every British analyst and commentator to be on the point of collapse, survived. Instead, an effective package was put together that for the time being saved the day. It is almost certain that there will be more dramas and more financial muscle needed before the crisis is over, but now it is at last obvious that European governments can and will do what it takes to keep the single currency alive. Pro-Europeans have something to cheer about.

The British reaction has been typically churlish, reluctantly acknowledging that the collapse of the single currency would not have been in our interests while fiercely debating whether the eurozone's response was a sticking plaster over a fatally wounded single currency or a more substantial dressing that might see the problem begin to be solved. Nobody thinks it will be enough. Thank God, goes the argument, that a tiny band of plucky realists in our newspapers and political parties saved Britain from the designs of the army of European enthusiasts – "fanatics" even – who wanted Britain to make common cause with our natural enemies, the countries of mainland Europe. We might have been directly involved in the disaster as well if we had listened to them.

Writing as somebody well disposed towards Europe and fellow Europeans – and the idea of a single currency – I can only observe that this army of enthusiasts holding Britain to ransom is a phantom. It might just about occupy the top floor of a London bus. It is a lonely business advocating the cause of the European Union in Britain, and to write in support of the single currency only demonstrates that one is soft in the head and knows nothing about economics. Countries, it is argued, must have the safety valve of being able to allow their currencies to devalue – or revalue – whatever their particular economic circumstances. Economic reason and political sovereignty alike mean that countries must retain their independent currencies.

But this is economics abstracted from history, society and the particularities of institutions – the same economics that cast banks as economic neutrals in efficient financial markets with no capacity to make economic mischief – just before the biggest financial crash in history. The trouble is that Europe is a continent like no other. Twenty-seven countries in the EU crowd into a relatively small land area; many have borders with four or five other countries and are exceptionally open to each other's exports and imports. If their exchange rates wildly bounce about, the disruption is intense. Not only that: there is one monster economic power, Germany, at this continent's heart. What a floating exchange rate regime means in practice, as Europe learned in the 1970s, 1980s and 1990s, is that every currency, including sterling, benchmarks itself against Germany. No interest rate can be lower than Germany's and any country tempted to have a fiscal policy that is less conservative than Germany's gets hammered by the financial markets. This is not sovereignty – this is being Germany's satellite.

Nobody wants to hear this in Britain. Instead, there is an imagined nirvana of floating exchange rates, completely deregulated labour markets, low tax and a minimal state that will deliver the alchemy of capitalist prosperity and to which Europe stands opposed. Poor, sclerotic Europe is encumbered by its single currency, a lush welfare state and its interdependencies made more complex by the byzantine and anti-democratic structures of the European Union. British intellectuals from whatever political perspective – Perry Anderson, Mark Mazower, Larry Siedentop – show their insight and cleverness by demonstrating the futility and undesirability of closer European union, as does almost every columnist and commentator. Britain needs to be free. Already, Conservative eurosceptics see an opening in the current situation, with David Cameron telling his party that he is "sharpening his pencil" to organise becoming even more detached from the European Union. Others in his party, with many on the left, want more: exit.

Last Thursday was a turning point. There will now be two Europes – the Europe of the eurozone and the rest. To make the single currency work while respecting the relative autonomy of nation states requires the unique institutional apparatus agreed at last week's special EU summit. With the measures put in place, the EU will have made its single currency work – a more democratic, fairer and ultimately workable currency regime for this continent than floating exchange rates shadowing German fiscal and monetary policy.

Enterprising governments will have created a unique institutional architecture to support the euro. State power will have been exercised to shape Europe's financial markets and thus its capitalism – neither market fundamentalism nor statism, but a blend of the two. It is this blend that is the secret of successful capitalism. The new architecture will trigger the restructuring of the innovation and investment systems of the weaker southern euro members. Gradually, their growth rates will accelerate and unemployment fall while Germany continues its second economic miracle, so pulling the rest of the eurozone up in its wake. The 2010s are likely to end with Europe in remarkably good shape.

But the immediate future is about further crises until the corner is turned. A loss of confidence in Italian and Spanish banks this autumn is a very real prospect. Greece, although thankfully relieved of post-First World War-style reparation payments, will almost certainly need further assistance. But my expectation is that the EU will carry on rising to the occasion. It is also absolutely right to try, too. Building Europe is a great, honourable and necessary project, why the good guys in British politics – Ken Clarke, Chris Patten, the Miliband brothers, Nick Clegg, Vince Cable – all share that upstairs deck of the London bus.

This week's expected dismal UK growth figures will show where the alternative philosophy leads – the disengaged state indifferent to the architecture of its capitalism or the condition of its working people so beloved of the British and American right. Mr Cameron is signalling he wants to use this opportunity to disengage Britain from its last European "restrictions and regulations" better to deliver so-called economic freedom. In truth, it is a barren wilderness. Me? I'll stay on the upstairs of the solitary euro bus. You could always join me. There's plenty of room.